The Reserve Bank of India (RBI) on Wednesday defended its recently released guidelines on merchant discount rate (MDR), saying that banks currently incur losses in the acquiring business (signing up new customers for point-of-sale or PoS machines), and the new guidelines were an attempt at making the business viable for them, even while encouraging the adoption of digital payments among small merchants. The MDR is the charge a merchant pays to a bank for availing card transaction services. The bank offering the service to the merchant is called the acquiring bank. RBI deputy governor BP Kanungo told reporters that the largest acquirer banks will continue to incur losses even with the new MDR structure. “With this also they will be making losses, but the loss will reduce,” he said. Kanungo said the central bank has verified the books of the five banks that control 70-80% of the acquiring business — ICICI Bank, HDFC Bank, State Bank of India, Axis Bank and Bank of Baroda — to get a fix on the costs incurred by them. The actual MDR paid by a merchant to the acquiring bank is a matter of negotiation between the two parties, the RBI clarified, adding that retailers generating a higher volume of transactions have better bargaining power and, as such, are able to wrest lower rates of MDR.

As per the guidelines, small merchants, or those with an annual turnover of up to Rs 20 lakh, will be charged a maximum of 0.4% for each transaction made through a physical PoS terminal or online and 0.3% for transactions using a QR or quick response code. The MDR will be capped at Rs 200 per transaction for small merchants. For merchants with an annual turnover above Rs 20 lakh, the charges will be no higher than 0.9% for transactions made over a PoS terminal or online and 0.8% for QR code-based transactions. The value of MDR for such merchants will have a cap of `1,000.

Kanungo said the Rs 20-lakh threshold was determined on the basis of slabs notified for the goods and services tax regime. He also observed that merchants had not sent any feedback to the draft guidelines on rationalisation of MDR. “I have now received a request from the retailers’ association to meet us and articulate some of the issues that they face,” he said.